Gates memo calls for new Web strategy at Microsoft

Reed Stevenson

SEATTLE: Microsoft Corp. must change its business to better compete against an array of new competitors offering technology and services on the Internet, Bill Gates, the world's largest software maker's chairman, said in a recent memo to executives.

"The broad and rich foundation of the Internet will unleash a "services wave" of applications and experiences available instantly over the Internet to millions of users," Gates said in the memo, which was sent to senior Microsoft executives in late October and obtained by Reuters and other media outlets this week.

Gates' memo acknowledged that the giant software maker is facing increased competition from rivals such as Google Inc., Salesforce.com Inc., Yahoo Inc. and Skype Inc. that have built businesses by delivering services over the Internet.

"We have competitors who will seize on these approaches and challenge us," Gates said.

"The next sea change is upon us," Gates said, evoking his famous memo a decade ago calling for Microsoft to shift its focus to the Internet, which resulted in a companywide effort to develop the Internet Explorer browser and unseat market leader Netscape -- and which led to the landmark antitrust trial with the U.S. government.

Microsoft, recognizing that it needs to deliver more of its software technology over the Web, announced last week that it would offer users some of the basic features of Windows and Office over the Internet, without the complexity of installing and maintaining the software in computer hard drives.

Gates' memo was also complemented by a more critical note from one of Microsoft's chief technology officers, Ray Ozzie, who recently joined Microsoft and was put in charge of Microsoft's efforts to deliver software services over the Web.

Ozzie, a longtime software services pioneer who sold his company Groove Networks to Microsoft earlier this year, said that Microsoft had moved too slowly to recognize industry trends and to use its technology to fend off new rivals.

"Just as in the past, we must reflect upon what's going on around us, and reflect upon our strengths, weaknesses and industry leadership responsibilities, and respond," Ozzie wrote in his memo, "As much as ever, it's clear that if we fail to do so, our business as we know it is at risk. We must respond quickly and decisively."

A Microsoft spokesman confirmed the contents of the memos but declined to elaborate on the strategy shift.

The memos also reflect a recent company-wide reorganization at Microsoft that put the MSN Internet business under the Windows division and put Ozzie in charge of Microsoft's efforts to deliver software services over the Web.